Are Wildfire Settlement Payments Taxable? The 2026 Rules

About 60,000 people around Spokane were told to pack up and leave this weekend, and more than 600 homes and buildings are already gone. It reminded me of a California client of mine who went through the same drill in one of our recent wildfires: evacuated, real damage to the property, then months of settlement back-and-forth. His payout came to just under a million dollars. He kept effectively all of it, because his property sat inside a declared disaster zone and two specific laws said that money wasn't income. One of those laws has already expired.

Are wildfire settlement payments taxable in 2026?

It depends on when the money arrived and which government is asking. Wildfire settlement payments received from 2020 through 2025 for federally declared disasters were exempt from federal tax, and that window has closed. California still excludes them through 2029. Even a taxable settlement usually produces less tax than people fear.

The federal exclusion expired on December 31, 2025

The Federal Disaster Tax Relief Act was signed into law in December 2024, and it did something unusually generous: it made "qualified wildfire relief payments" flat-out excludable from federal income. That covered compensation for losses, damages, additional living expenses, lost wages, personal injury, and emotional distress from any wildfire that was federally declared a disaster after 2014, as long as the amounts weren't already covered by insurance. The catch was the window. Only payments received between January 1, 2020 and December 31, 2025 qualified, per the IRS's wildfire relief payment FAQ.

A bipartisan fix exists. H.R. 5366 would write the exclusion into the Code permanently for wildfire disasters declared through the end of 2026, and the House Ways and Means Committee passed it unanimously back in March. As of this writing, it is still not law. So thousands of fire victims with settlements paying out this year are sitting in limbo while a bill everyone apparently agrees on waits for floor time. If your settlement is still in negotiation, the year the check arrives is now a tax variable worth real money, and the attorneys negotiating your payout are usually not thinking about it.

California made its own call: no state tax through 2029

Sacramento didn't wait around. Senate Bills 132 and 159, signed in June and September of 2025, exclude qualified settlement amounts paid by a settlement entity (a utility, a fire victims trust, or similar) from California income tax for taxable years beginning January 1, 2021 through December 31, 2029. The FTB's December 2025 Tax News lays out the details. And California's version is broader than the federal one in an important way: the fire only needs a Governor-declared state of emergency or a Presidential declaration. Either one works.

Two things follow from that. First, a settlement landing in 2026 can be taxable federally and still completely exempt in California, which surprises people because it's usually the FTB playing the villain. Second, the exclusion reaches back to 2021, so if you paid California tax on a wildfire settlement in an earlier year, an amended return within the normal statute of limitations (generally four years from a timely filed return) can get that money back.

No exclusion doesn't mean the whole check gets taxed

Most disaster money was never going to be fully taxed anyway, even without the special exclusion. Sort the checks into three piles and the picture gets a lot less scary.

Relief payments. FEMA grants and similar qualified disaster relief payments for living expenses, repairs, and rebuilding aren't taxable income, period, under Section 139. IRS Publication 547 covers this. No expiration date.

Insurance proceeds. Insurance money is only income to the extent it exceeds your adjusted basis in the property, meaning roughly what you paid plus improvements. And even a real gain usually doesn't get taxed right away. If your main home was destroyed in a federally declared disaster, Section 121 can wipe out up to $250,000 of the gain ($500,000 married filing jointly), and Section 1033 lets you defer the rest by rebuilding or replacing, with four years to do it instead of the usual two. Between basis, the home-sale exclusion, and reinvestment, a family that rebuilds often owes nothing at all.

Litigation and settlement-fund payments. Money from a utility, a settlement trust, or a lawsuit is the pile where the expired federal exclusion actually stings, and where California's 2029 window still protects you at the state level. It's also where the details of what the payment compensates you for (property, lost wages, emotional distress) start driving the answer. Settlements have a habit of looking clean on the surface while the tax consequences ride along underneath, the same dynamic we wrote about with divorce equalization payments.

If the fire cost you more than anyone paid you back

Now flip it. Say the reimbursements didn't cover the damage. Since 2018, personal casualty losses are generally deductible only when they're attributable to a federally declared disaster (starting in 2026, certain state-declared disasters count too). You claim the loss on Form 4684, reduce it by $100 per event, then reduce the total by 10% of your adjusted gross income, and deduct what's left on Schedule A.

Here's the math for a homeowner I'll call Dana, using tax year 2026 rules:

Dana's casualty loss, tax year 2026

• Drop in the home's value from the fire (per appraisal): $150,000

• Insurance reimbursement: $90,000

• Unreimbursed loss: $60,000

• Per-event reduction: subtract $100, leaving $59,900

• 10% of her $180,000 AGI: subtract $18,000

• Deductible loss on Schedule A: $41,900

One warning on that math: the friendlier "qualified disaster loss" rules you may have read about (a $500 floor, no 10% AGI haircut, deductible on top of the standard deduction) only apply to disasters declared between January 1, 2020 and September 2, 2025. A brand-new 2026 fire gets Dana's math above, not the friendly version, unless Congress acts.

And a genuinely useful piece most people never hear about: Section 165(i) lets you elect to deduct a disaster loss on the prior year's return instead of waiting to file the current one. Lose your home in August 2026, amend your 2025 return, get the refund while you're rebuilding. The election deadline is six months after the original due date of the disaster-year return, per Revenue Procedure 2016-53, so for a 2026 loss you have until roughly mid-October 2027. California allows the same prior-year election; just write the disaster name at the top of the return.

In the disaster area but your house is fine? You still get relief

This part applies to far more people than the loss rules do. When the IRS declares disaster relief for an area, everyone whose address sits in the covered counties gets postponed deadlines automatically. No application, no proof of damage, nothing to attach.

The January 2025 Los Angeles fires are the clearest example. Every taxpayer in LA County, all ten million or so, got their filing and payment deadlines pushed to October 15, 2025: returns, all four estimated payments, business filings, even pass-through entity elective tax payments. The FTB's LA County fire relief page spells it out: no supporting documentation required. The FTB matched the IRS county-for-county. Your house could be untouched twenty miles from the burn area and the relief was still yours.

If a disaster hits your county this year, check the IRS tax relief in disaster situations page before you panic-file or panic-pay. The Spokane fires are days old as I write this, so federal relief there hasn't been announced yet, but this is the mechanism to watch. And nine extra months of deadline is nine extra months of planning room, which pairs well with the moves in our year-end tax planning guide.

Before you sign anything

The rules right now are lopsided: federal law got stingier on January 1, California stayed generous through 2029, and a fix is parked in Congress. So the decision in front of you is mostly about timing and paper. When the settlement pays out, what the agreement says each dollar compensates, whether you rebuild, and which year eats the loss. Those are choices, and most of them can't be un-made after the fact.

If you're holding a settlement offer or a folder of fire receipts and you're not sure what any of it means for April, let's sort it out before the money moves. You can grab a time with me here.

This is general information, not advice about your specific situation. Disaster tax rules are changing as I write this, and the details of your case (what was paid, when, and for what) change the answer. Sit down with a CPA, ideally us, before you act on any of it.